What is mezzanine debt vs preferred equity?
- Definition
- Mezzanine debt is generally a loan that is secured by a property and senior to any equity, but junior to the senior loan on the property. Preferred equity, on the other hand, is an equity investment in the property-owning entity. It is not secured by the property but rather by an interest in the entity investing in (or owning) the property.
Mezzanine debt and preferred equity both sit between the senior debt and common equity in the capital stack and generally serve similar functions to fill a gap in funding and/or provide additional leverage.
The primary difference between the two is that mezzanine debt is generally structured as a loan that is secured by a lien on the property while preferred equity, on the other hand, is an equity investment in the property-owning entity.
Both mezzanine debt and preferred equity can be effective tools to provide a borrower or sponsor with higher levels of leverage at a lower cost than common equity. In return, investors get a more secured position relative to the equity but a higher yield for their additional risk in being subordinate to the senior loan.